REPORT ON EXAMINATION

OF

FLORIDA FAMILY INSURANCE COMPANY

NAPLES, FLORIDA

AS OF

DECEMBER 31, 2005

BY THE OFFICE OF INSURANCE REGULATION

TABLE OF CONTENTS LETTER OF TRANSMITTAL...................................................................................................................... -

SCOPE OF EXAMINATION...................................................................................................... 1 STATUS OF ADVERSE FINDINGS FROM PRIOR EXAMINATION ....................................................... 2

HISTORY ...................................................................................................................................... 4 GENERAL ..................................................................................................................................... 4 PROFITABILITY OF COMPANY ...................................................................................................... 5 DIVIDENDS TO STOCKHOLDERS ................................................................................................... 6 MANAGEMENT............................................................................................................................. 6 CONFLICT OF INTEREST PROCEDURE............................................................................................ 7 CORPORATE RECORDS ................................................................................................................. 8

AFFILIATED COMPANIES ...................................................................................................... 8

ORGANIZATIONAL CHART ................................................................................................... 9

FIDELITY BOND....................................................................................................................... 10

PENSION, STOCK OWNERSHIP AND INSURANCE PLANS .......................................... 10

STATUTORY DEPOSITS......................................................................................................... 10 TERRITORY ................................................................................................................................ 11 TREATMENT OF POLICYHOLDERS............................................................................................... 11

REINSURANCE ......................................................................................................................... 11 CEDED ....................................................................................................................................... 11

ACCOUNTS AND RECORDS.................................................................................................. 12 CUSTODIAL AGREEMENT ........................................................................................................... 12 MGA AGREEMENT .................................................................................................................... 12 COST SHARING AGREEMENT...................................................................................................... 12 INVESTMENT MANAGEMENT AGREEMENT................................................................................. 13 RISK-BASED CAPITAL................................................................................................................ 13 INFORMATION TECHNOLOGY (IT) REPORT ................................................................................ 13

FINANCIAL STATEMENTS PER EXAMINATION............................................................ 13

ASSETS ...................................................................................................................................... 14

COMMENTS ON FINANCIAL STATEMENTS.................................................................... 17

LIABILITIES................................................................................................................................ 17

SUMMARY OF FINDINGS ...................................................................................................... 19

CONCLUSION ........................................................................................................................... 20

Tallahassee, Florida December 1, 2006 Kevin M. McCarty Commissioner Office of Insurance Regulation State of Florida Tallahassee, Florida 32399-0326 Dear Sir: Pursuant to your instructions, in compliance with Section 624.316, Florida Statutes, and in

accordance with the practices and procedures promulgated by the National Association of

Insurance Commissioners (NAIC), we have conducted an examination as of December 31, 2005,

of the financial condition and corporate affairs of:

FLORIDA FAMILY INSURANCE COMPANY

720 GOODLETTE ROAD NORTH, SUITE 500 NAPLES, FLORIDA 32605

Hereinafter referred to as, the “Company”. Such report of examination is herewith respectfully

submitted.

1

SCOPE OF EXAMINATION

This examination covered the period of January 1, 2003 through December 31, 2005. This examination

commenced, with planning at the Florida Office of Insurance Regulation (Office), on August 1, 2006 to

August 4, 2006. The fieldwork commenced on August 7, 2006 and was concluded as of December 1,

2006. The examination included any material transactions and/or events occurring subsequent to the

examination date and noted during the course of the examination.

This financial examination was a statutory financial examination conducted in accordance with the

Financial Condition Examiners Handbook, Accounting Practices and Procedures Manual and annual

statement instructions promulgated by the NAIC as adopted by Rules 69O-137.001(4) and 69O-

138.001, Florida Administrative Code, with due regard to the statutory requirements of the insurance

laws and rules of the State of Florida.

In this examination, emphasis was directed to the quality, value and integrity of the statement assets

and the determination of liabilities, as those balances affect the financial solvency of the Company.

The examination included a review of the corporate records and other selected records deemed

pertinent to the Company’s operations and practices. In addition, the NAIC IRIS ratio report, the A.M.

Best Report, the Company’s independent audit reports and certain work papers prepared by the

Company’s independent certified public accountant (CPA) were reviewed and utilized where applicable

within the scope of this examination.

We valued and/or verified the amounts of the Company’s assets and liabilities as reported by the

Company in its annual statement as of December 31, 2005. Transactions subsequent to year-end 2005

were reviewed where relevant and deemed significant to the Company’s financial condition.

2

This report of examination is confined to financial statements and comments on matters that involve

departures from laws, regulations or rules, or which are deemed to require special explanation or

description.

Status of Adverse Findings from Prior Examination

The Company was last examined by representatives of the Office as of December 31, 2002. The

following is a summary of adverse findings contained in the Office’s prior examination report along

with the resulting action taken by the Company.

Capital Stock

The Company did not report Common capital stock, Gross paid in and contributed surplus and

Unassigned funds properly in the Annual Statement. The Common capital stock account should equal

the number of shares issued times the par value for each share. Gross paid in and contributed surplus

is the amount of capital received in excess of the par value of the stock issued. Expenses relating to the

issuance of capital stock are charged to Unassigned funds. Resolution: The Company corrected the

method of reporting Common capital stock, Gross paid-in and contributed surplus and Unassigned

funds in the 2004 Annual Statement and was in compliance with SSAP No. 72 on the 2005 annual

statement.

3

Management

Most of the minutes of the meetings of the Board of Directors were not signed and none of the minutes

were dated. Resolution: The Company provided signed and dated copies of all minutes for the Board

of Directors and Audit Committee for the examination period.

Upon the conversion of Florida Family Mutual Insurance Company to Florida Family Insurance

Company on March 14, 2001, there was no organization meeting of record to elect Company directors

as required in Section 607.0205, Florida Statutes. Resolution: The Company has subsequently

elected its directors and officers in accordance with its Articles of Incorporation and Bylaws.

The Company did not notify the Office regarding resignation of certain directors. Resolution: The

Company has since notified the Office in writing of any changes in directors and have incorporated this

process in their meeting minutes.

Conflict of Interest

At December 31, 2002, the Company adopted a policy statement that required annual disclosure of

conflicts of interest, in accordance with the NAIC Financial Condition Examiners Handbook. However,

the statement was not signed by all directors and officers on an annual basis. Resolution: Conflict of

interest statements were signed each year since 2002.

4

Custodian Agreement

The custodian agreement with First Union (Wachovia) was not in compliance with parts 2a, 2b, 2g,

2h, 2j, and 2n of Rule 69O-143.042, Florida Administrative Code. Resolution: The current custodian

agreement was in compliance with parts 2a, 2b, 2g, 2h, 2j, and 2n of Rule 69O-143.042, Florida

Administrative Code.

HISTORY

General

The Company was incorporated on March 19, 1996, under the laws of the State of Florida, as a non-

assessable mutual property and casualty insurer and commenced business on May 1, 1996, with the

name of Florida Family Mutual Insurance Company.

During 2001, in conjunction with approval of the Office, the policyholders of Florida Family Mutual

Insurance Company approved a conversion of the Company from a non-assessable mutual insurer to a

stock insurer. Under the terms of the demutualization offering and a separate related agreement

between the Company and Florida Family Insurance Services, LLC, (FFIS), a $5 million debenture was

exchanged for approximately 98.9% of the shares of the Company.

During 2001 the articles of incorporation and the bylaws were amended to reflect the demutualization

documented above.

5

In accordance with Section 624.401(1), Florida Statutes, the Company was authorized to transact the

following insurance coverage in Florida on December 31, 2005:

• Fire, Allied Lines, Homeowners Multiple Peril and Inland Marine

Capital Stock As of December 31, 2005, the Company’s capitalization was as follows:

Number of authorized common capital shares 6,000,000 Number of authorized preferred capital shares 10,000,000 Number of shares issued and outstanding-common 449,737 Number of shares issued and outstanding-preferred 0 Total common & preferred capital stock shares issued $ 4,497,370 Par value per share for common $ 10.00 Par value per share for preferred $ 1.00 The control of the Company was maintained by FFIS, which owned 99.4% of the stock. Individual

shareholders owned the remaining 0.6% of the stock.

Profitability of Company

The following table shows the profitability trend (in dollars) of the Company for the period of examination, as

reported in the filed Annual Statement.

2005 2004 2003 Premiums Earned 12,646,199 11,773,837 12,100,430 Net Underwriting Gain/(Loss) (3,655,670) (6,306,941) 2,072,205 Net Income (2,584,197) (3,549,982) 1,808,843 Total Assets 42,503,927 37,367,143 31,149,174 Total Liabilities 31,196,810 28,162,238 20,929,369 Surplus As Regards Policyholders 11,307,118 9,204,905 10,219,804

6

Dividends to Stockholders

The Company declared and paid no dividends to its stockholders in 2003, 2004 or 2005.

Management

The annual shareholder meeting for the election of directors was held in accordance with Sections

607.1601 and 628.231, Florida Statutes. Directors serving as of December 31, 2005, were:

Directors

Name and Location Principal Occupation Walter Dale Hardy Naples, FL

President & CEO, Florida Family Insurance Company

Timothy James McKay Chicago, IL

Lawyer, McKay & Nora, LLP

William Henry Wiggs CFO, Florida Family Insurance Company Arlington Heights, IL William Tuttle Montei Middleton, WI

President & CEO, PIC Wisconsin

Amy Houghton Bash Barrington, IL

Homemaker

David Paul Behnke CFO, BCS Financial Corp.

The Board of Directors in accordance with the Company’s bylaws appointed the following senior

officers:

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Senior Officers

Name Title

Walter Dale Hardy President William Henry Wiggs Chief Financial Officer Robert Allen Liggett Controller Walter Vernon Rice Vice President Peter Joseph Corrigan Chief Underwriting Officer Diane Marie O’Connor Vice President Jamie Victoria Hobbs Assistant Secretary Lydia Gale Creydt Chief Information Officer Anthony Obie McCarty Vice President Catherine Anderson Secretary

The Company’s board appointed several internal committees in accordance with Section 607.0825,

Florida Statutes. Following are the principal internal board committees and their members as of

December 31, 2005:

Executive Committee Audit Committee Investment Committee

Walter D. Hardy David P. Behnke William T. Montei William H. Wiggs William T. Montei Walter D. Hardy William T. Montei Timothy J. McKay William H. Wiggs Amy H. Bash David P. Behnke

Conflict of Interest Procedure

The Company adopted a policy statement requiring annual disclosure of conflicts of interest, in

accordance with the NAIC Financial Condition Examiners Handbook.

8

Corporate Records

The recorded minutes of the shareholders, board of directors and audit committee meeting were

reviewed for the period under examination. The recorded minutes of the Board adequately

documented its meetings and approval of Company transactions in accordance with Section

607.1601, Florida Statutes.

The minutes of the board of directors recorded that the board established an audit committee as

provided by Section 624.424(8) (c), Florida Statutes, and approved the Company’s investments as

required by Section 625.304, Florida Statutes.

.

AFFILIATED COMPANIES

The Company was a member of an insurance holding company system as defined by Rule 69O-

143.045(3), Florida Administrative Code. The latest holding company registration statement was filed

with the State of Florida on June 15, 2005, as required by Section 628.801, Florida Statutes, and

Rule 69O-143.046, Florida Administrative Code.

An organizational chart as of December 31, 2005, reflecting the holding company system, is shown

below. Schedule Y of the Company’s 2005 annual statement provided a list of all related companies

of the holding company group.

FLORIDA FAMILY INSURANCE COMPANY ORGANIZATIONAL CHART

DECEMBER 31, 2005

Florida Family Insurance Company

Florida Family Insurance Services, LLC

Halogen Software, LLC Barrington Insurance Group, LLC

LakeView Underwriting Managers, LLC

100%

Barrington Capital, LLC

100%

100% 100%

0.6%

Individual

Shareholders

99.4%

9

FIDELITY BOND

The Company maintained fidelity bond coverage up to $5,000,000 with a deductible of $50,000, which

adequately covered the suggested minimum amount of coverage for the Company as recommended by

the NAIC. Additional financial institution bond coverage of $2,000,000 was held, covering the Company

for computer systems fraud, trading loss coverage and forgery or alteration of the insuring agreement.

The Company also had property contents coverage for their business locations in Naples and

Jacksonville, Florida.

PENSION PLANS

The Company had a qualified defined contribution plan (401K) sponsored by the parent. The

Company’s contribution to the plan was noted in the notes to the financial statements.

STATUTORY DEPOSITS

The following securities were deposited with the State of Florida as required by Section 624.411, Florida

Statutes:

MATURITY PAR MARKETSTATE DESCRIPTION RATE DATE VALUE VALUE

FLORIDA

CD with Wachovia Bank, National Assoc. 4.8% 04/07/07 300,000$ 300,000$

TOTAL FL DEPOSITS 300,000$ 300,000$

TOTAL OTHER DEPOSITS -$ -$ TOTAL SPECIAL DEPOSITS 300,000$ 300,000$

10

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Territory

The Company was authorized to write business only in the State of Florida.

Treatment of Policyholders

The Company established procedures for handling written complaints in accordance with Section

626.9541(1) (j), Florida Statutes.

The Company maintained a claims procedure manual that included detailed procedures for handling

each type of claim in accordance with Section 626.954(1)(i)3,a, Florida Statutes.

REINSURANCE

The reinsurance contracts were reviewed by the Company’s appointed actuary and were utilized in

determining the ultimate loss opinion.

The above mentioned contracts complied with NAIC standards with respect to the standard insolvency

clause, arbitration clause, transfer of risk, reporting and settlement information deadlines.

Ceded

The Company ceded risk on a quota share and excess of loss basis through an intermediary,

Barrington Insurance Group, LLC, an affiliate. The quota share reinsurance contracts were with

Hannover Re Ltd. and E & S Re Ltd., both located in Ireland.

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ACCOUNTS AND RECORDS

PriceWaterhouseCoopers, an independent CPA firm, audited the Company’s statutory basis financial

statements annually for all years under review, in accordance with Section 624.424(8), Florida Statutes.

Supporting work papers were prepared by the CPA as required by Rule 69O-137.002, Florida

Administrative Code.

The Company’s accounting records were maintained on a computerized system. The Company’s

balance sheet accounts were verified with the line items of the annual statement submitted to the Office.

The Company maintained its principal operational offices in Naples, Florida, where this examination was

conducted.

The Company had the following agreements in place at December 31, 2005:

Custodial Agreement

The Company had a custodial agreement with Wachovia Bank, NA dated November 30, 2004. The

agreement was in compliance with Rule 69O-143.042, Florida Administrative Code.

Managing General Agent Agreement

The Company entered into a managing general agent (MGA) agreement with an affiliate, FFIS, on

September 1, 2000. There have been no amendments to the contract since that date.

Cost Sharing Agreement

The Company entered into a cost sharing agreement with their parent, FFIS, and its subsidiaries,

Halogen Software, LLC, Barrington Insurance Group, LLC and Lakeview Underwriting Managers, LLC,

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on January 1, 1999. The agreement was for certain operations and their costs, when it was deemed

financially advantageous for them to be incurred by one entity, and was allocated to the other affiliates

on a percent of use basis.

Investment Management Agreement

The Company entered into an investment management agreement with the manager, APS Financial

Corporation, on January 1, 2003. The agreement specified that the manager may buy, sell, convert and

otherwise trade in securities which met the Company’s investment guidelines.

Risk-Based Capital

The Company reported its risk-based capital at an adequate level.

Information Technology (IT) Report

James Graeff, senior consultant with Computer Aid, Inc. performed a computer systems evaluation on

the Company. Results of the evaluation were noted in the IT report provided to the Company. There

were no significant findings noted by the IT examiner, however there were four minor recommendations.

FINANCIAL STATEMENTS PER EXAMINATION

The following pages contain financial statements showing the Company’s financial position as of

December 31, 2005, and the results of its operations for the year then ended as determined by this

examination. Adjustments made as a result of the examination are noted in the section of this report

captioned, “Comparative Analysis of Changes in Surplus.”

FLORIDA FAMILY INSURANCE COMPANY Assets

DECEMBER 31, 2005

ExaminationPer Company Adjustments Per Examination

Bonds $26,555,224 $26,555,224

Cash and short-term investments 12,471,366 12,471,366

Aggregate write-in for invested assets 130,743 130,743

Uncollected premiums and agents balances in the course of collection 1,778,293 1,778,293

Amounts recoverable from reinsurers 343,473 343,473

Current federal and foreign income tax recoverable and interest thereon 283,638 283,638

Net deferred tax asset 577,078 577,078

Electronic data processing equipment and software 41,712 41,712

Aggregate write-in for other than invested assets 322,400 322,400

Totals $42,503,927 $42,503,927

14

FLORIDA FAMILY INSURANCE COMPANY Liabilities, Surplus and Other Funds

DECEMBER 31, 2005

Examination PerPer Company Adjustments Examination

Losses 1,996,035$ 1,996,035$

Loss adjustment expenses 195,028 195,028

Other expenses 742,015 742,015

Taxes, licenses, and fees 254,228 254,228

Unearned premiums 7,927,707 7,927,707

Ceded reinsurance premiums payable 2,484,043 2,484,043

Funds held by company under reinsurance treaties 15,062,272 15,062,272

Provision for reinsurance 325,823 325,823

Payable to parent, subsidiaries and affiliates 2,209,659 2,209,659

Total liabilities 31,196,810$ 31,196,810$

Common capital stock 4,497,370$ 4,497,370$

Gross paid in and contributed surplus 8,058,922 8,058,922

Unassigned surplus (1,249,175) (1,249,175)

Surplus as regards policyholders 11,307,117 11,307,117

Total liabilities, capital and surplus 42,503,927$ 42,503,927$

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FLORIDA FAMILY INSURANCE COMPANY Statement of Income

DECEMBER 31, 2005

Underwriting Income

Premiums earned $12,646,199DEDUCTIONS:Losses incurred 6,363,628Loss expenses incurred 1,627,712Other underwriting expenses incurred 8,310,529Aggregate write-ins for underwriting deductions 0Total underwriting deductions $16,301,869

Net underwriting gain or (loss) ($3,655,670)

Investment Income

Net investment income earned $1,067,044Net realized capital gains or (losses) 0Net investment gain or (loss) $1,067,044

Other Income

Net gain or (loss) from agents' or premium balances charged off ($4,156)Finance and service charges not included in premiums 28,555Aggregate write-ins for miscellaneous income 0Total other income $24,399

Net income before dividends to policyholders and before federal & foreign income taxes ($2,564,227)Dividends to policyholders 0Net Income, after dividends to policyholders, but before federal & foreign income taxes ($2,564,227)Federal & foreign income taxes 19,970

Net Income ($2,584,197)

Capital and Surplus Account

Surplus as regards policyholders, December 31 prior year $9,204,905

Gains and (Losses) in Surplus

Net Income ($2,584,197)Change in net deferred income tax 932,027Change in non-admitted assets (924,565)Change in provision for reinsurance (321,052)Capital changes: Paid in 1,561,330Surplus adjustments: Paid in 3,438,670Surplus adjustments: Transferred from capital 0Examination Adjustment 0Change in surplus as regards policyholders for the year $2,102,213

Surplus as regards policyholders, December 31 current year $11,307,118

16

17

COMMENTS ON FINANCIAL STATEMENTS

Assets

Electronic data processing equipment and software $41,712 The computer software and hardware purchased in 2005 was less than $25,000 in value and did not

meet the criteria of an asset in accordance with Section 625.012(11), Florida Statutes. Due to the

immateriality of the asset, no adjustment was made to the financial statement.

Liabilities

Losses and Loss Adjustment Expenses $2,191,063

A Company employee, the actuary appointed by the Board of Directors, rendered an opinion that the

amounts carried in the balance sheet as of December 31, 2005, make a reasonable provision for all

unpaid loss and loss expense obligations of the Company under the terms of its policies and

agreements.

The Office actuary reviewed work papers provided by the Company and was in concurrence with this

opinion; however, the Company incorrectly recorded outside adjuster costs paid to an affiliate as

Defense Cost Containment (DCC) rather than Adjusting and Other Expense (AOE) costs. That

practice was not in compliance with Rule 69O-137.001, Florida Administrative Code.

.

FLORIDA FAMILY INSURANCE COMPANY COMPARATIVE ANALYSIS OF CHANGES IN SURPLUS

DECEMBER 31, 2005

The following is a reconciliation of surplus as regardspolicyholders between that reported by the Company andas determined by the examination.

Surplus as Regards Policyholdersper December 31, 2005, Annual Statement $11,307,118

INCREASEPER PER (DECREASE)

COMPANY EXAM IN SURPLUS

ASSETS: No adjustments.

LIABILITIES: No adjustments.

Net Change in Surplus: 0

Surplus as Regards PolicyholdersDecember 31, 2005, Per Examination $11,307,118

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SUMMARY OF FINDINGS

Current examination comments and corrective action

The following is a brief summary of items of interest and corrective action to be taken by the Company

regarding findings in the examination as of December 31, 2005.

Losses and Loss Adjustment Expenses The Company was recording outside adjuster costs paid to an affiliate as DCC rather than AOE

costs. This was not in compliance with the Annual Statement Instructions that are adopted by Rule

69O-137.001, Florida Administrative Code; and it is recommended that the Company properly record

these costs in all future filings.

Electronic data processing equipment and software

The computer software and hardware purchased in 2005 was less than $25,000 in value and did not

meet the criteria of an asset in accordance with Section 625.012 (11), Florida Statutes; and it is

recommended that the Company non-admit this item in all future filings.

20

CONCLUSION

The customary insurance examination practices and procedures as promulgated by the NAIC have

been followed in ascertaining the financial condition of Florida Family Insurance Company as of

December 31, 2005, consistent with the insurance laws of the State of Florida.

Per examination findings, the Company’s Surplus as regards policyholders was $11,307,118, which

was in compliance with Section 624.408, Florida Statutes.

In addition to the undersigned, the following individuals participated in the examination, John C.

Berry, Financial Examiner/Analyst Supervisor, Stephen Feliu, Financial Examiner/Analyst II and

Joseph Boor, FCAS, Office Actuary. We also recognize the participation of Computer Aid Inc. with

the IT examination.

Respectfully submitted,

___________________________ Richard A. Shaffer Financial Specialist Florida Office of Insurance Regulation